Q3 2020 Azek Company Inc Earnings Call
[music].
Thank you good morning, everyone. We issued our earnings press release this morning to Investor Relations portion of our web site at investors Dot com.
Well as the 8-K on the Fccs website.
I'm joined today by Jesse thing, our Chief Executive Officer, and Ralph Nicoletti, Our Chief Financial Officer.
Before we begin I would like to remind everyone that during the call Eightyk management may make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act. A 1995. These include remarks about future expectations anticipation beliefs estimates forecasts plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results could differ materially from those indicated or implied by such statements such risks and other factors are set forth in the Companys earnings release posted on the web site and provided in our final prospectus with respect to our initial public offering as filed with the securities.
And Exchange Commission.
The company does not undertake any duty to update such forward looking statements. Additionally, during today's call. The company will discuss non-GAAP measures, which we believe could be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with gap.
A reconciliation of adjusted EBITDA to net income net loss calculated under GAAP and adjusted gross profit gross profit calculated under GAAP as well as reconciliations for other non-GAAP measures discussed on this call can be found in our earnings release, which is posted on our website and will be included on our form 10-Q for our third quarter fiscal 2020.
Now I'd like to turn the call over to Jesse thing.
Good morning, it's great to be speaking with you today on our first earnings call as a publicly traded company.
I Hope you all are safe and managing through these challenging times.
As you know we completed our initial public offering in June which was the result of the significant hard work and dedication of our employees, who helped build A's act into a leading manufacturer beautiful sustainable low maintenance building products.
I'd like to thank all involved in the process for a successful outcome.
We look forward to partnering with our new shareholders as we focused on expanding the business and creating value in the years to come.
I'd also like to recognize our team for their leadership in our response to the pandemic and its impact.
Consistent with our core value of do the right thing our first priority has been and we'll continue to be the safety of our employees our customers in our communities.
At the onset of the pandemic, we made a number of proactive safety and operational changes across our business.
And offered enhance benefits such as employee bonuses and extended sickly among others.
The exact team responded quickly and efficiently working closely with our channel partners.
This has enabled us to execute our plans in a difficult and uncertain environment.
Thank you to the entire A's Act team and our channel partners for your commitment and dedication.
Hopefully by now each of you had the opportunity to review our earnings press release and read that we had a strong June and are seeing an acceleration in the business as consumers continue to focus on their homes and invest in outdoor living.
Let me begin by reiterating our strategic priorities and the opportunities we see ahead of us.
We believe that we are a unique company with a compelling long term growth story, we have leading brands that are known for their innovation, we manufacture in the U.S. using an increasing amount of recycle materials.
We are committed to diversity and found governance.
And we're focused on large growing markets that are benefiting from strong trends and the continued conversion from wood to our types of materials.
Our long term goals are to deliver 8% to 10% revenue growth annually and to operate with leverage between two and three times.
In addition, we see a long term opportunity to increase adjusted EBITDA margins by 500 basis points from the fiscal year 2019 level.
We have been and we'll continue to focus on key initiatives to achieve these long term goals.
These initiatives include first.
Deliver revenue growth.
We have multiple levers to drive above market growth and accelerate material conversion, including investing in new product introduction, and expanding and leveraging our downstream focused sales and marketing team.
Second expand margins.
We will further expand our margins through the use of recycled materials and our manufacturing processes and through our continuous improvement programs known as the exact integrated management system or aims.
Third.
Do the right thing.
We will continue to improve our social and environmental impact.
And corporate governance by continuing to invest in doing the right thing.
Fourth.
Invest in our strengths, we will continue to build out our core strengths, which include brand material science integrated manufacturing and our strong customer connection.
Our execution is on track and consistent with what we shared during the IPO process.
During the quarter, we made solid progress against each of our strategic initiatives and I'll share some specifics shortly.
Turning to our third quarter results.
Despite a volatile and challenging market our team continued to execute and deliver sales and adjusted EBITDA growth.
Our residential business grew 5.5% compared to the third quarter, a year ago, while our commercial segment declined approximately 20%.
Adjusted EBITDA grew almost 10% year over year, and adjusted EBITDA margins expanded 200 basis points from the same period the year before.
These results are on top of very strong sales and adjusted EBITDA growth during this quarter in 2019.
Our commercial business, which represents 6% of our year to date segmented adjusted EBITDA experienced declines in the third quarter.
As a reminder, this business tends to track more closely to GDP and the broader economy.
This grant products portion of the business has historically been driven by commercial repair and remodel and during the quarter had a modest downturn in sales.
The Viacom portion of the business has a broad domestic customer base with over 20% of the business exposed to retail and trade show end markets, where volumes have drastically slowed and in some cases effectively shut down.
Our commercial business has some great products that include high privacy bathroom partitioned that could become increasingly necessary along with additional barrier products.
Although we saw some improvement in the quarter this business like the broader economy faces a difficult market environment in the near term.
With respect to the residential business early in the quarter the industry slowed as shutdowns and stay at home orders adversely impacted the pro channel.
Adversely impacted part of the retail channel and impacted and customer activity.
However, as the quarter progress conditions began to improve and by June we saw a sharp acceleration in demand across our residential channels.
Repair and remodel and new construction experienced continued favorable tailwinds after the brief slowdown.
The retail channel saw relative strength throughout the quarter as home improvement centers were open and accessible while the pro channel got off to a slower start during the quarter in specific geography and came back very strong in the second half of the quarter.
Sales within our exterior business declined in April and May as our strongest geography were disproportionately impacted by closures, but then rebounded strongly in June and that momentum has continued through July.
Sales within our deck mail and accessory category increased over 9% and sell through for the residential segment overall, that's what our distributor partners held so our dealers was up in the mid teens versus a year ago.
As market conditions improve.
The focus on our growth drivers has served us well.
We improved our interaction with our customers in multiple ways throughout the quarter.
Our sales teams on the ground aggressively engage with customers and consumers digitally to drive demand.
We launched our better tech better deck campaign meant to inspire homeowners on the technological superiority and design versatility of our timber tech products.
We made investments in our digital in customer experience capabilities to improve how consumers engaged and learn about our products online.
Importantly, both web traffic in sample orders saw tremendous growth and nearly doubled during the quarter relative to the same quarter of last year.
We expect new products to deliver growth on an ongoing basis, and we've seen strong acceptance of our new product introductions for 2020.
Our value added exterior products that are designed to drive material conversion and increase contractor productivity continue to support above market growth.
And our simplified and improve railing offerings have experienced very positive market reception.
The launch of our timber Tech Pro reserve decking line and the timber Tech edge Prime plus decking line has solidified our position in two key segments and have made a material contribution to our results.
Operationally during the quarter, our team worked tirelessly to respond to the volatile environment, which began with the slowdown and then quickly reversed course due to rapidly increasing demand, while continuing to execute against key operational initiatives.
These initiatives are on track with what we shared with you during the IPO process.
Include the expansion of our manufacturing capacity the increased use of recycle raw materials and the execution of our continuous improvement programs.
During the quarter, we started the first stage of our decking capacity expansion with further additions coming online later this year.
The recent strategic acquisition of return polymers has put us in a strong position to continue to expand our recycling efforts.
We continue to evaluate new ways to leverage their strong capability.
The combination has yielded many new opportunities, including expanded uses of recycle PTC and the development of new customer focus initiatives, such as our post construction waste recycling.
The integration is on track and we're achieving our synergy targets.
Taken together, our market opportunity growth drivers operational execution and margin execution during the quarter clearly demonstrate the resiliency of our business model.
While the success of our initiatives and the strong demand. We're seeing is encouraging. It is also placed a strain on our capacity and resulted in shortages in certain decking and railing categories.
As we exited the quarter, we were unable to fully meet demand and we are operating our plants at full capacity.
We expect decking demand to continue at a high level for the remainder of the fiscal year and our fourth quarter deck rail and accessory sales will be limited by our ability to meet the full amount of demand.
We have taken a prudent steps to accelerate the deployment of our next two phases of our previously announced expansion and expect additional capacity to come online during the second and third quarters of our fiscal year 2021.
We continue to be confident in our business model and the long term opportunity for growth and our expanding our capacity plan from the original 100 million dollar investment to approximately $180 million to support future market demand and the large would conversion opportunity.
Strategic capacity expansion plan includes an incremental decking production capacity of approximately 70% and a new manufacturing facility over the next 18 to 24 months.
Our current outlook is based on a number of factors indicators and macro economic variables.
We integrate and shared data with our channel partners and regularly survey, our dealer and contractor customers to understand their activity levels and backlogs.
Which today continue to show considerable strength.
We conducted detailed analysis on our sell through in our inventory in the channel, which is currently below levels at the same time last year.
We also evaluate consumer engagement activity, such as web activity sample orders and quote requests, which as mentioned earlier have accelerated.
Finally, we also utilize forecast to correlate to our business such as repair and remodel and new housing data combined with traditional macroeconomic variables.
For short and long term visibility on potential demand and demographic trends.
While we see many positives, including an expanded focus on the home and outdoor living.
We also recognized that we're in the midst of a pandemic that's influencing the broader economy and has the potential to impact our markets and consumer sentiment in 2021.
Taken in their totality. These factors influence our favorable near term outlook for our residential business and a cautious approach to 2021.
We remain highly confident in the long term market opportunity for the business driven by secular trends.
Material conversion.
And our own execution.
With that I'd like to turn the call over to Ralph who will discuss our financial results and the outlook in greater detail.
Thank you Jesse.
As mentioned earlier, we are pleased with our fiscal third quarter results and our ability to manage our business effectively in a difficult operating environment.
All comparisons will be made on a year over year basis compared to the same quarter ending June Thirtyth 2019.
For the fiscal third quarter for 2020, net sales increased by $2.4 million were 1.1%.
The $223.7 million.
The increase was attributable to higher sales growth in a residential segment on top of strong growth of 27% were mid teens organically in last year's third quarter.
Dick rail and accessories grew 9.4% and after a slow start due to the market shutdowns early in the quarter or exteriors business grew almost 20% in the month of June and most recent sale trends.
We continue to be strong.
Net sales for residential segment increased by 5.5%.
But the residential segments contribution to consolidated net sales was partially offset by a decrease in our commercial segment of 19.7% as compared to the prior year period.
Gross profit for the third quarter fiscal 2020 decreased by $300000 were 0.4% $75.1 million.
Adjusted gross profit for the third quarter fiscal 2020.
Increased by $700000, 4.9% to $91.2 million from $90.5 million in the third quarter fiscal 19.
Adjusted gross profit margin was 40.8% down 10 basis points from last year, including approximately 90 basis point negative effect from Kogan 19 related costs.
Selling general and administrative expenses increased by $15 million were 29.8% to $65.2 million about 29% of net sales.
Third quarter fiscal 2020.
The increase was primarily attributable to IPO related expenses of $22 million, including the recognition of stock based compensation expense, partially offset by lower marketing related expenses and personnel costs as we took steps to adjust our cost structure in light of the initial kobin 19 disruption.
We recorded a net loss of $52.1 million for the third quarter fiscal 2020 compared to net income of $1.5 million for the third quarter fiscal 2019.
Primarily due to the loss on extinguishment of debt and increased selling general and administrative expenses related to the IPO, which combines totaled approximately $60 million.
Adjusted EBITDA for the third quarter increased by $5 million were 9.6% year over year to $57.8 million, mainly driven by higher sales as well as lower selling general administrative costs, partially offset by higher coven 19 related production costs.
Which included shutting down.
All of our factories for approximately a week.
Adjusted EBITDA margin expanded 200 basis points to 25.8% from 23.8% year ago.
Now turning to our segment results as we noted during our IPO process. Our residential segment had a slow start to the quarter.
Particularly in exteriors as several geographies had construction either shut down were disrupted significantly.
Our debt rail and accessories business was also affected but as the quarter unfolded. We're homeowners continue to invest in their outdoor living spaces and many states deemed residential construction essential.
In addition restrictions restrictions were ease in certain regions, allowing activity to resume.
This resulted in a significant demand increase both deck rail and accessories as well as exteriors as we saw sell through for the quarter increased mid teens with June significantly above that level.
This resulted in the residential segment net sales for the third quarter to increase by $10 million were 5.5% to $192.6 million.
We're seeing strong acceptance of our new deck relevant and exterior trim products and we are benefiting from the downstream salesforce investments, we have made in our exteriors and retail channel teams.
Adjusted EBITDA for the third quarter increased by $8.2 million were 15.2% $62.3 million, mainly driven by higher sales as well as lower SGN a costs as a result of lower marketing and travel expenses.
Partially offset by higher Kobin 19 related production costs.
Commercial segment net sales through the third quarter decreased by $7.6 million were 19.7% to $38.7 million.
As just discussed earlier this business was affected by the slowdown in commercial repair and remodel as well as certain challenged end markets such as retail and trade shows.
Looking at our balance sheet and cash flow.
As of June Thirtyth, 2020, we had cash and cash equivalents of $215.1 million and approximately $97 million available for future borrowings under our revolving credit facility.
Total debt as of the end of June 2020 was $506.7 million, including $467.1 million under the term loan agreement and $44 million outstanding under our revolving credit agreement, which we paid off in July.
We successfully completed or 38 million share IPO of class a common stock on June 16, which raised in aggregate $819.4 million of proceeds.
We used approximately $783 million of the proceeds to reduce our debt.
Our net debt to adjusted EBITDA leverage is 1.5 times as of the end of the quarter.
The IPO proceeds have significantly strengthens our balance sheet and enabled capital structure flexibility for the future.
As a reminder, our long term financial model target is to operate with leverage in the two to three times EBITDA range with our capital priorities of supporting the core business strategic M&A and debt repayment.
Net cash provided by operating activities was $11.3 million and $20.3 million for the nine months ended June Thirtyth, 2020, and 2019, respectively.
The $9 million decrease.
It's primarily result of increased working capital usage to support higher production in demand levels.
As we enter our fourth quarter demand remains very strong with our key residential end markets and has resulted in shortages in certain decking and railing products.
We're in the process of adding additional capacity to satisfy the long term growth opportunity that we see.
As Justin mentioned earlier, we are accelerating and expanding our capacity expansion plan from an original hundred million dollar investment to approximately $180 million.
This is a multi phase program, we're in our first phase, which we partially implemented in the third quarter and we'll complete in the fourth quarter will add approximately 20% more decking capacity.
Second phase will be implemented in our fiscal second and third quarters of 2021 and.
And then the third phase in the early part of fiscal 22, as we ramp up a new facility in the western part of the U.S.
The full capacity expansion is expected to result in approximately 70% incremental decking capacity over the next 18 to 24 months.
In terms of capital spending pacing, we now expect total capital expenditures of $85 million to $90 million in fiscal 2020, reflecting a step up in capital spending of about $15 million, resulting from the accelerated capacity investment.
The remaining $65 million increase is expected to largely be spent in 2021.
We expect to Ed and the additional 20% decking capacity during the second half of fiscal 20, while improving margins and we remain on track with achieving our long term adjusted EBITDA margin expansion objective of 500 basis points.
Now moving to our outlook.
Our outlook is based on current strong demand within our residential segment and balanced by the economic uncertainty caused by the pandemic, including high unemployment and the potential for more market disruption.
According to industry forecasts, the home improvement and repair and remodel outlook for 2020 has improved since may but such forecasts continue to suggest negative to low single digit growth for the full year.
Specific to exit.
We are encouraged by our current demand trends and internal signals like web traffic in sample orders growth.
Over the next quarter, we expect continued robust demand with our residential segment across both our debt rail and accessories and exteriors businesses, partially offset by continued weakness in our commercial segment.
We are providing guidance for the fourth quarter fiscal 2020 for net sales growth in the range of 12% to 17% year over year and adjusted EBITDA growth in the range of 14% to 19% year over year.
Additionally, while we don't plan to provide forward looking guidance multiple quarters out on a regular basis given that we provided a forecast during the IPO process in this volatile environment, we are providing a directional update.
Our net sales growth for our residential segment for the first quarter of fiscal 21 is low double digit growth.
We expect the current trends in the commercial segment will continue through the end of the calendar year.
Finally for modeling purposes, we assume approximately 152.2 million weighted average diluted shares outstanding for the fourth quarter and 123.5 million weighted average diluted shares outstanding for the full fiscal year 2020, and a full year tax rate of 6.7%.
Going forward, we plan to issue full year sales and adjusted EBITDA guidance that we will update quarterly as needed.
I'll now turn the call back to Jesse for closing remarks.
Thanks Ralph.
In closing I'd like to reiterate my belief that aid that is a truly unique company that is well positioned to succeed in an attractive and growing market.
We've got a strong culture and abroad portfolio.
And our poised to benefit from multi year secular trends in outdoor living and would conversion.
We are a proven leader in innovation, we have multiple levers to drive above market growth and we see a runway to improve our margins with our focus on expanding the use of recycled materials.
We see additional opportunity through our continuous improvement programs.
We remain confident in our ability over the long term to grow the business, 8% to 10% on an annual basis and in our ability to drive 500 basis points of adjusted EBITDA margin expansion.
We look forward to partnering with our new shareholders as we strive to create value in the years to come.
With that operator, please open the line for questions.
At this time, we'd like to take any questions. You may have for us today to ask a question. Please press star one on your telephone keypad.
Yes.
Got it yourself to one question and one follow up your first question Matthew Bouley with Barclays. Your line is open.
Good morning.
Congrats on the first results out of the gate here and thanks for taking the questions.
Firstly I wanted to ask about the decision to accelerate the capacity additions and.
And the incremental addition, so I guess in the short term.
But to what degree is the Q4 guide dependent on some of that new capacity or the accelerating capacity coming on schedule in Q4 and longer term or are you actually taking a more constructive view on the conversion for more decking accelerating here. Thank you.
Thanks, Matt and good morning.
Let me let me start with your second question, which is our longer term view you know as we've talked about we see a tremendous opportunity to continue to drive conversion in the market and we've seen a lot of really positive secular trends and.
And this most recent those were trends coming into the pandemic as a reminder, we grew almost 16%.
Coming into the pandemic and and as we as we see more people staying at home.
We believe that the trends are intact for the long term and that as people focus more on home.
There might be an opportunity for those trends to accelerate so having said all that we think it's prudent.
That we continue to look at staying ahead of the curve relative to our growth opportunity. So that really addresses or the second question I I think as as you look at the short term I'll I'll have Ralph make some very specific comments, but we've been adding capacity and as Ralph pointed out we're bringing cups.
Half of the online as we speak in.
And and we expect to accelerate that through the fall so.
As we look at at our guidance.
We're aware of Ah of those capacity adds in so Ralph I'll I'll turn it over to you see if theres any additional color on that.
Sure Thanks, Jesse and good morning, Matt.
As I mentioned in my remarks.
We we started the first phase of the capacity.
Expansion in the third quarter, and we're finishing it we're finishing it down in the fourth in the fourth quarter here, we're not dependent on that.
And expansion of capacity to to me, we talked about for Q4.
And so we're we're comfortable with the capacity relative to the guidance that we provided.
But it is a multi phase program again with the first phase.
Being finished in Q4, and then in our fiscal second and third quarters of 21 there'll be another.
Expansion and then.
Later on as we go into calendar 2002.
To finish the finished the program in the third shades.
Got it okay. Thank you for all that color I guess secondly on the same topic have to asking about the margin side.
Impacts from all that so so.
Anyway to quantify kind of what's baked into the Q4 guidance from a startup cost standpoint, as this comes online and certainly with.
Your plans into 21 and 22, how should we think about modeling mute these costs from the additional capacity over that timeframe. Thank you.
Yes, the as we as we think about.
Startup startup costs and the transitions of capacity at that.
If you recall from our discussions back in the IPO process to we certainly contemplated that we would be expanding capacity and and also you know moving ahead on the cost reduction agenda principally in recycling.
And we factor, we factored all that into our into our guidance and ER or and we're on target.
We we continue to believe we have the 500 basis points of opportunity in EBITDA margin growth over the next several years.
And I will quantify specifically.
The the number in the fourth quarter, but it certainly does contemplate our.
It certainly does contemplate are.
Our a startup of the first phase in the third and fourth quarter here and you could tell from our guidance that you know we're improving our margins.
Both in the third quarter in the fourth quarter, while we're adding about 20% capacity.
Okay. Thank you Ralph and thank you Jessica.
Your next question is from John Lovallo with Bank of America.
Open.
Good morning, guys thing, though thank you for taking my questions first one.
Maybe we could just digging a little bit more on the July trends.
I know you said that they were favorable anywhere they sort of mid teen year over year like June and then is there any update you could potentially give us on what you're seeing in August.
You know just did a very high level, where we're yes, I think Ralph touched upon the strength of June.
We continue to as Ralph pointed out in his comments, we continue to see.
Nice and favorable momentum as we progress through a through July and August and obviously given our guidance.
We expect that to to continue through the quarter specific month to month or you know, we're just seeing strong trends.
Throughout without getting into any more detail.
Okay, Great and then I think one of the things that you had contemplated in the prior outlook was some potential distributor destocking over the winter I mean as your view on that change at this point, given where demand has been.
We are you know during a bulk of our comments, we mentioned that the inventory position within our channel is and it's one of the areas we track and it's below.
Where it was the previous year, given that and given the stability of the economy.
We are we believe it's a it's a significantly lower probability that there would be.
Restocking as we go into the fall.
That's helpful. Thank you guys.
Your next question is from.
Okay with Goldman Sachs.
Thank you good morning, everyone.
First off I, just wanted to dip a little bit more into into the demand trends can you talk about any shifts that you're seeing in terms of next that are coming through.
Maybe along with that you know I know you noted some of the did a very positive trends you're seeing in terms of your web traffic can you just give us any more details on that too.
Yeah, Yeah with a with respect to mix we have.
Our growth has sustained across the portfolio and and so similar to earlier discussions we might have had our miss our mix is a consistent.
With what we projected and and continues to show the strength of Ah abroad.
A base of the portfolio and forgive me Susan I I forgot your second question. So if you could repeat it.
Yeah sure I just wonder if you know you commented on the strength that you're seeing in terms of traffic to the web site can you just give us a little more color. There like is it people spending more time on their site is it more traffic to their site. Some combination there and are there certain products or categories people seem to be more or less interested in any kind of detailed on that.
Sure.
Our our timber tech side is focused on the consumer and by definition is focused on the consumer that's that's looking at outdoor living.
And we are so so really well with respect to the date I shared earlier, it's really around the deck rail and accessory.
Consumer and what we see there is an increase in web site visits.
We see on increase in engagement once they're on the web site and we also see an increase in sample orders placed and Ah you know as you may have heard that's that's one of the industry indicators of interest in the category and it certainly one that we use to undertake.
Sam where our consumers are and so we have a the numbers I mentioned are really in reference to to all of those variables, where we've seen and continue to see a really strong interaction with within with ourselves and doing that digitally I'll bring.
Up one other point as we look at long term market conversion.
We we tend to get excited the more consumers interact with the category and we believe that as they get better educated the market will continue to move away from would end to end our types of products. So we we also view that as a positive for the long term.
Okay. That's helpful. I'm told you also talk a little bit in terms of raw material cost you know what that was like during the quarter and how the how you're thinking about that looking out you know obviously, there's been probably some deflationary tailwinds that you've seen but what are you thinking about the sustainability of that.
Yeah, Hi, Susan good where it's Ralph take that one.
First on raw materials, or if you go back a couple of months.
You know when.
I'll call in the you know April may period.
As the as the Coke in 19 situation was really unfolding. We saw we saw declines in resin prices I would tell you, though that that was fairly short lived.
As as the economy, Oh critical under construction side picked up.
Were you know, we're starting to see those prices stabilize and and in tick up.
In terms of RPL.
Theres.
There's there's some benefit from from net short decline it really will flow through in our first since our first quarter.
Fiscal 21, just the way it flows through inventory so what we're seeing now after a very short decline. What we're seeing now is you know some stabilization of of prices and Uh huh.
You know potentially even some ticking up a prices of polyethylene looks to be around flat to prior year PVC moving up a little bit more [laughter].
Okay, perfect color and good luck.
Yeah. Thanks, Thank you.
Your next question is from told me with Jefferies. Your line is open.
Hey, good morning, everyone. Congrats on a really impressive quarter out of gates.
Ralph can you give us a little more sense is how much capacity, you're adding in phase two in phase three and assuming you know everything comes on very smoothly.
What type of growth can you sustain into next 12 to 18 months, just looking past to maybe fourth quarter, because you know industry broadly sold out to your ability to kind of delivered at capacity will kind of dictate how much growth is going to be able to say.
Yes, so feel good morning.
Again, as we look at the total program.
We're we're estimating about adding 70% capacity increase that's obviously very significant from a from where we from where we are.
First phase is adding 20%.
I'm not going to get specific by phase and will do is give you updates as we move through the through the quarters. The next the next phase. The next phase of capacity. It is you know as significant or more than the current one in the phase one.
That we're doing so there's there's meaningful capacity coming on and in our fiscal second and third quarter.
21.
Okay, and that's where you had the other part of your question I Might've missed out and it sounds like you're adding a lot of capacity. So doesn't sound like it's got to limit your ability to grow excuse it's 20% and it another 20% plus at the that's helpful.
Yeah, and I guess, it get Yep, and then thinking next 12 to 24 months out.
Longer term once again, you kind of reiterate the 500 million of margin expansion opportunity from self help initiatives. So that's great, but free shipping you know the startup cost for some this capacity, especially the greenfield side of things.
Does that push out some that timing and more importantly, do you have the recycling capacity.
Given this uptick.
And capacity, you're adding more broadly for decades.
Yeah on yes, let me.
Oh I'll just give you know, let me and we said it earlier and we feel we feel really good.
I just want to correct on the 500 basis points, where we're a little smaller that 500 million might might be a little much for us right now, but but 500 basis points relative to relative to the 500 basis points.
The areas that we outlined a where that we're executing execution items against that namely recycle.
Our aims program and the long term SGN, a leverage as we lap public company costs.
We feel really good about the execution those are on track and we feel good about a the execution of that and when we laid out that execution.
Is as you might recall during the process. We also highlighted that that execution included.
Various startup costs as as we migrated forward so so at a high level.
We're we feel really good about that opportunity relative to specifics on next year. We're we're obviously not in a position right now to talk specifics on on.
21.
Okay. Thanks, I appreciate the color.
Okay.
Okay.
Our next question is from Mike Dahl with RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
First one sticking with the capacity side so I.
I think there was brought by end around kind of the secular in nature of growth and people understand.
You know the current dynamics in terms of seeing very strong.
Demand trends as things settled out post the initial coca disruption, but the you know the pushback. We here is more around the magnitude of additions when looking at you know what your largest competitor has announced and now what you're announcing and thinking about kind of acumen.
Capacity adds for the industry being announced at a time when Theres still.
Potentially a little difficulty discerning what the what the sustained demand trend Dolby since you've got some potential stimulus effect now you've got.
Gift in terms of wallet share it spending in home for South of home, how do you respond to that Jesse.
Yeah I.
First off as as we look at the history of of the market. This is an industry that has operated you know and has operated well with slack capacity in in the system and and so we feel really good about the.
Opportunity of or the capacity coming online.
And and as it relates to the long term trends, we believe that the capacity as needed.
To be able to us to meet our long term trend so.
We're really comfortable with our ability to continue to execute and to have favorable market dynamics.
Given the combination of historical track record of managing through that and also given yeah. You know the significant opportunity. We see ahead of US you know the other thing I'll highlight is.
Just as we're able to rapidly accelerate our capacity adds.
If it seems appropriate we would also have the ability to stage it in the future in a different way and just as a reminder, as as we add capacity.
We typically do it in a modular way so we have an ability to scale.
How fast we deploy yet and.
The at the pace, we scale that up and and we said that when we talked about 100 million and and we also believe that as we as we look at the a 180 million I'll I'll add one additional point the capacity expansions.
Our to benefit our deck rail and accessory lines, but they're all but we also see ongoing opportunity in our exteriors business.
And we as part of the 100 million and as part of 180 million, we're going to continue to.
Take steps to facilitate the growth in those businesses a diverse attacks.
Acquisition and that team continues to drive a really strong innovation I'm working and the A's acting continues to drive market penetration. So we have two very strong businesses, there and and part of what we're we're deploying will also facilitate their growth.
That's great. Thank you.
Very helpful. And then the second question I may have missed it but kind of a follow on to fill I think.
There was a question around given the.
Stronger demand outlook given the increased the are in a.
Capacity here, how are you thinking about the recycling capacity that you've got are there plans to accelerate.
Your your capacity adds in recycling or could that be an avenue.
Similar to return polymers that you.
Look at to pursue bolt on.
M&A to backward integrate.
Yeah, well, obviously as you point out return polymers as has been a terrific acquisition for us and really sets us up not only for now but is a you know is a very scalable operation and we view our recycling capability is something that will also be able to scale in the future the specific.
Picks of you know what we're gonna do obviously, we'll share when when appropriate.
Okay. Thanks.
Our next question is from Ryan Merkel of William Blair. Your line is open.
Hi, everyone two questions from me.
First off I think you mentioned low double digit revenue growth for first quarter 21, just clarify that you would and then there's this assume the first 20% phase is fully online and then are you assuming any channel voting and that or is it just matching self correct.
Hey, Ryan.
Ralph Good morning.
Yeah it.
As it relates to Q1 of 21 again.
We felt given.
The volatile environment. When there was no now a couple of months ago. When we you know during the process of the IPO. We we gave an outlook. We felt it was important to get to provide some update there.
And.
Clearly you know a couple of months a couple of months ago. You know we thought there was the potential for Destocking you'd always we look at the strength of the strength of demand and the inventory in the channel. That's that's low Oh, our assumption is that we're going to see continued solid sell through and.
And.
Given the given the current inventory levels, yeah, the who will be sums restoration of inventory in the quarter.
We.
We have with our capacity plans, we have ample capacity to meet the level the guidance that we gave up and as we're putting.
Putting 20% more on road in and this quarter here, finishing out.
Okay. Thanks, that's helpful that Ralph and then.
Second question guidance implies EBITDA margin down about 100 basis points sequentially in Fourq you. Despite the higher rats. You can can you just talked about the driver sequentially. Just we know the pieces, yes, I think the probably the biggest piece to point out as we're going into the fourth quarter and we're we're incurring about $2 million.
As of incremental public company related costs, which really weren't in the third quarter.
Yeah, I think that's one of the second.
The second is just in the third quarter as you recall early in the quarter with the onset of the cold that 19 situation. We pulled back on marketing early in the quarter and we're going to return to kind of more normal levels in the fourth quarter. So we're very confident and D. Our ability to get operator.
Yes, DNA leverage.
But you know we're stepping into your higher public company related costs and a normalization of marketing spend those are the two.
Differences sequentially, we're going to continue to have good productivity out of the factories and alike.
And we'll have some.
Cobot 19 related expenses in Q4, but to a much lesser degree than what we saw in Q3.
Where we actually had factory down.
Very helpful I'll pass it on thanks.
Appreciate it thank you Ryan.
Your next question is from some Clark with Deutsche Bank. Your line is open.
Hey, good morning. Thanks for your question just given the impressive demand that you're seeing in decking and the capacity constraints that the industry is seeing more broadly how are you thinking about the pricing environment going forward do you think you know increase conversion away from wood.
Presents an incremental opportunity for pricing here is there anything as it relates to pricing baked into that margin target as well.
Let me start now I'll, let Ralph give you a little bit more granularity I in its more the latter question. You had you know as we look at conversion just as a reminder, we look at conversion in all segments and we.
We see conversion and premium woods.
We see.
Conversion in mid tier woods, and we see a conversion and entry level. So.
So I I believe that we should or I believe that we'll we'll continue to see that conversion opportunity and that really sets us up well for a broad mix and then specific on on the earlier question I'll throw it over to Ralph.
Yes.
Good morning, so and I'm on pricing.
You know pricing specifically at something it it's something we always look at.
You know and we'll continue to evaluate that I would I would just say for.
For the direction that we gave on our Q1 21 that doesn't that doesn't.
Include or contemplate pricing typically if we were work to price like we did this past year, we wouldn't see realization in the first in our first fiscal quarter, just the way the timing in the execution would work, but that's something that's something we're evaluating will continue we'll continue to evaluate.
Okay got it and then just sticking on that a you know your 500 basis points <unk> EBITDA margin improvement target on an arm is there anyway to quantify some of these dynamics you know either from a percentage or timing standpoint, you know whether it be.
The underlying operating leverage there as soon as savings or you know the benefit from increases cycle material or even just how much of that 500 basis points is control over snack are dependent and like I said earlier I know, you're not getting 2021 guidance, but if theres any way to think about the timing.
Some of these buckets.
Over the next couple of years now would be helpful. Thanks.
Yes.
I think it's important thing about the 500 basis points just to do you have to step back to the components that we talked about you know, it's largely driven by you know.
By two areas gross margin improvement and within gross margin improvement. The majority of that benefit is going to come from our recycling initiatives and our aims initiatives and you know in and in the operating side, there's there's not a lot of volume leverage.
You get a little bit of benefit from that but not a lot in in the gross margin line because 90% of our costs are variable.
So the majority of the the 500 basis points will come through.
It will come through.
That the the operation side.
And then there is SGN a leverage will that will pick up once we lap or public company costs.
And no I think we've also showed that we have the ability to.
You know to manage our our margins or EBITDA margins.
As as volumes as volumes fluctuate because door levers that we could hold in the us DNA side.
With.
That would mitigate any.
Decremental decremental type margin, which we've talked about in the past.
I think in terms of timing, we're really not wanting to lay that lay that out specifically the 500 basis points is is clearly a long term goal howdens, having said that we have specific programs and actions to support it and execute against it and internally we do it and you know and we'll give you.
Updates as I mentioned about guidance, we'll we'll give you a view of.
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Yeah of our annual guidance for for 21.
You know.
Later on after the end of this fiscal year.
Yes, so that just macro a very quick macro is as I mentioned earlier and then we've laid out some milestones and we're on track. So for example.
No. This particular quarter as we speak or you know, we where we're ramping up a specific formulation in our our PVC facility.
That really sets up the next a year plus of cost savings for us to be able to continue to utilize.
Higher levels of PTC recycling and utilize a different streams of receipt.
PDC recycling and so you know I I think what Ralph recurring too is when we get into 21 will be able to provide a little bit more color on specific milestones like that and those also include expanding our our capability with the third recycle line that we talked about.
Okay got it that's helpful. Appreciate it and congrats on a good first quarter as a public company.
Thanks.
Thank you Sir your next question is from Keith Hughes with trace Suntrust. Your line is open.
[noise] Cds from truest.
Just a question on commercial real quick.
Got all the pressures that you highlighted in the.
Intro.
The EBITDA number was a nice positive in the quarter is that kind of EBITDA level.
Possible. The next several quarters given that these pressures are going to continue.
You know as.
You know as we pointed out earlier that particular business has some real positives to it and the teams done a you know a terrific job of managing through as you pointed out a difficult macroeconomic climate, it's got some differentiated products and in a and a nice market position.
You know specifics to EBITDA margins et cetera, or you know for that particular business a in the future we're not disclosing it except that we have.
Confidence in that team to.
Continue to execute at the levels or if not better levels in the future.
Okay. Thank you.
Appreciate it thanks Keith.
Your next question is from Adam slogan.
It seems it's open.
Hey, Good morning, everyone takes the question just curious if in the quarter in the near term here, if you've seen much of an impact from the shortage of decking lumber that's out in the market and you guys, maybe seeing some incremental sales because of people that ability to source that.
Well as you pointed out certainly and and in certain geographies.
Theres shortages of different types of materials are longer lead times.
Yeah, you know the way I would put it is we saw an increase in and pricing I believe at around 2080.
Of lumber and then we saw a subsequent decrease in that and the conversion rate has has continued to sustain.
And so.
We are you know we continue to see the opportunity for conversion and bumped view that as you know something that is a you know a quarter to quarter thing we view it has a longer term trends.
So we continue to see opportunity you know kinda independent of some of the volatility we've seen in wood.
Got it and then just on the inventory levels broadly seems like they are pretty low is there any discernible difference between the dealer channel in retail.
We don't disclose specifics or you know between between the two channels.
I'll just leave it at that.
Okay. Thanks.
Our next question is struggling with B. Riley <unk>.
Thank you had fantastic quarter gentlemen.
As it relates to the email traffic as it relates to I'd like to traffic and sample demand growth, what's the lag to win this eventually works its way through the channel.
And results in shipments it at your facilities.
You know we have.
I I would say I can give you a a range of what our market Research says you know I would say it varies on a shorter side closer to two months.
Maybe even one to two months' all the way to the the longer side. It can be over a year end and the reason why that ranges. So abroad is is really driven by the fact that the decision making process.
For this particular category I can be a more extended a decision making process.
So I consider that range you know in there a it's a pretty broad range I understand but but that's what the data shows.
And then circling back to the Capex mansion decisions.
Can you characterize that actually that's due to.
You know improved market share gains that you picked up during the quarter or is it really just broadly more demand just all across the business.
I would say for us.
As we look at the long term opportunity is that we see we believe it's prudent to make.
The investments now to really set us up a to be able to better service the market and also have an opportunity to continue to participate.
And potentially drive the market growth in the future and and so we certainly as we talked about on this call already RC short term.
Positives and you know as we look to the mid term we've got macroeconomic uncertainty.
But this focus on the home.
This incremental benefit we might see that's extended you know really put put us in a position to.
To feel comfortable with the decision to or to expand our view of what we need to execute the next 24 months.
And the comment in your answer there to drive market growth in the future was interesting does that suggest that maybe you missed out on growth and the current quarter because of being at full capacity.
Yeah, I I think Ralph highlighted in in his comments that we were unable to service Oh, all the demand that we saw within the quarter.
Thank you very much.
Appreciate it thank you Alex.
Our next question is from Trey Grooms with Stephens, Inc. Your line is open.
Hi, good morning, Thanks for taking my question.
First one is on a.
Kind of following up on some of the questions around a commercial.
On on the commercial business I mean, clearly it's a it was.
It's continued to be soft him and everybody's on that side of.
Oh, it's facing some some headwinds here, but I guess looking at the quarter down you know about 20% or so.
And Ralph mentioned continued softening demand is going through the calendar here, but just as far as magnitude I mean, if have you guys seen any signs of improvement there or is it kind of still running in that range or just trying to get a feel for how we should be modeling out that's out of the business.
Little bit more become.
You know trade you know we thought.
We thought it just be prudent to.
At this point in time, you know guide to the trend guide to the trends that we're seeing.
There are some.
There are some pockets you know of stabilization within you know within that business and some of the fundamentals, including some of the the new products that you know we're offering.
You know both on the you know the outdoor side as well as you know in bathroom partitions and those kind of areas are very good and as always strong interest, but we're in this window where.
It's a tough environment too you know exactly say when things will fully recover we're starting to see some things stabilize.
We just thought it would be prudent to firm up from our own guidance standpoint, do you assume that through at least the end of the calendar year that you know the trends will continue but there are there are some pockets of.
Of the of improvement, but it's not something that we'd say today, you know you should be banking on in modeling.
Long term as we've talked about this is a this is a business that largely will track with GDP overtime.
Understood, Yes, if I could <unk> and I'm, sorry trade just just to maybe add briefly on.
And it's a bit of a contractual element you know, it's they're good businesses into segments that take place.
But just to give you a sense in the last nine months there even off contribution as we look at segment EBITDA, it's about 6% and so.
It's important that you know that we continue to service those customers are putting a relative sense. It still up a pretty modest part of our business yeah totally get that and then thanks for the update on the mix. So up my follow up is just maybe in the we just a little bit higher around.
Around the the capacity increase you talked about.
You know, a 70% incremental deck and an increase of 70% incremental decking capacity and I think you know the initial plan is that was 100 million was that there was a you were going to see increases both on the composite decking side as well is PBC.
And just the I know you talked about this just a little bit was you know continuing expansions in trim anixter things like that but can you give us any idea of how the new expansion is kind of broken up into those categories. I think the initial plan it was little bit more on the composite side versus PBC.
Any any color there as we look at kind of the types of products, you'll be increasing that incremental.
I I would just say directionally that we you should consider that both sides will benefit.
And Ah both sides will benefit roughly equally.
Both on our cap polymer side and our cap composite side.
Perfect. Thank you and congrats again on a on the good quarter.
Appreciate it thanks. Thanks.
Your final question comes from current younger with D.A. Davidson Your line is open.
Yes, good morning, everyone and thanks for all the details just one quick one could you talk about somebody initiatives you have going on to deliver above market growth on the residential side and how you're kind of thinking about future opportunities to increase your penetration in the retreat retail channel.
And how you balance the new product introductions trying to keep some consistency within the channel.
Yeah first Ah. Thank you for the question.
So so let me start at the high level and and hopefully will.
I'll be able to get to your second question also you know it's up as we look at growth. Yeah. You know we feel we're fortunate in that we have multiple levers to drive growth.
And and so at one level, we've made pretty significant investments in sales and marketing and downstream activities that that's both.
At the primarily within the residential side and then the three.
Components there.
So we we've made a pretty significant a investment than that downstream activities. So for example on the.
On the exterior side you know, we we bought burst attacks and we've expanded the SEC Oh salesforce. So that's an opportunity in it and it's really an opportunity to continue to drive penetration.
Okay. So that's one bucket the second bucket is.
Really around.
Execution around the consumer.
And you know it falls on to that marketing bucket of just making sure that we continue to engage the consumer appropriately and and help them along the journey and then the third component.
As as you pointed out was around new products and we've got a commitment bulk to ourselves and and the marketplace that you know we want to continue to have a strong new product pipeline that helps them.
You know filled their needs and drive productivity. So for example in our exteriors business that we've talked about that rail accessories, but I'm just curious business. We continue to dry products that help contractors with productivity as as their repairing and installing new exteriors and so as we look at the balance.
Are you know, we we look to make sure that we're planning seats for the future.
And Ah and we pay things based on both our operational changes and.
Based on what we think is is appropriate for the market and so we you know that that's a it's good inside it's always a conversation that we have on on making sure that that were adequately.
That's why we have we have greater capacity to launch new products.
Then we feel the market could absorb and so we're always a in and in process of a pacing that so hopefully that gives you.
Our perspective, and I hope I answered your second question also.
Yeah, No that's very helpful and a good luck in the coming quarter.
Appreciate it thank you very much.
We have no further questions. This time I turn the call back to management for closing remarks.
Thank you offer for taking a the time this morning to Ah to engage us on our on our first earnings call.
We're committed to doing the right thing we're committed to the safety of of our team members and our consumers and our channel partners and work and pay a and we're committed to continue to execute a this strategic objectives.
That we've laid out so with that thank you very much and we look forward to ER to further conversations over.
Over the next weeks and months have a great day.
This concludes today's conference call you may not.
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